A key fundraiser for former New South Wales energy minister Chris Hartcher has admitted to soliciting donations from banned donors and using slush funds and a conservative fundraising organisation to cover his tracks, allegedly with the blessing of senior Liberals.

Ray Carter, employed by Hartcher since 1988, told the Independent Commission Against Corruption (Icac) in Sydney that he funnelled hundreds of thousands of dollars in political donations to the state Liberal party through a trust fund, the Free Enterprise Foundation, and two sham companies, Eightbyfive and Micky Tech.

“I did collect money and give it to Eightbyfive for the purposes of coming back to the Liberal party,” Carter said.

Carter said he was introduced to Eightbyfive by the former Hartcher staffer Tim Koelma, who “told me he had a company I could use to put some funds to come back to the Liberal party”.

Much of the money Carter collected in the lead-up to the 2011 state election was sent to the Liberal-linked Free Enterprise Foundation so that its origin could be hidden. Carter said this was done with the blessing of Paul Nicolaou, the former head of the NSW Liberal party fundraising arm, the Millennium Foundation.

“I was told [sending money through the Free Enterprise Foundation] was legal because it went to Canberra and came back to the [state] Liberal party,” Carter said. “I asked Paul [Nicolaou] the legality of it, and he said more or less that’s what the Free Enterprise was for.”

Donations from property developers, alcohol, tobacco and gambling companies were banned in NSW at the time Carter was collecting money. Icac has heard that a “substantial” amount of the $700,000 donated by the Free Enterprise Foundation to the NSW Liberals before the 2011 election came from prohibited donors.

Nicolaou resigned after he was named at the beginning of this inquiry.

In frank testimony, Carter said the use of the Free Enterprise Foundation to wash banned donations was common knowledge in the party.

“Everyone knew about it,” he said.

“Including Mr Hartcher?” Watson asked.

“He would have known about it,” said Carter.

Carter said his former boss, Hartcher, did not “sanction” fundraising from prohibited donors but that he “would have recognised some of the names” of the people giving money to his campaign.

“I had my own free run for what I did,” Carter said. “I had a job to do; I was on a roll. People were virtually throwing money at me and I didn’t necessarily go into a lot of detail with [Hartcher].

The commission was shown an email sent to Carter by the acting state director of the Liberal party, Simon McInnes, at the height of the 2011 election campaign, suggesting he, too, was aware of the way the Free Enterprise Foundation was being used.

It refers to the “last lot of cheques received today that were to be conducted through the Free Enterprise Foundation”, saying the money had been received too late “and been sent back to your office for alternative processing”.

Sums of $500 were periodically drawn from Eightbyfive’s account and deposited shortly after in Carter’s bank account, but he rejected suggestions the money was payment for his fundraising work.

The inquiry is investigating allegations that Hartcher and other senior Liberals oversaw a “systematic subversion of NSW electoral funding laws” before the 2011 state election, using a network of slush funds and trust accounts to hide money solicited from property developers and other banned donors. The money was allegedly traded for political influence on planning decisions.

Among those who paid into the alleged slush funds include property developer Tony Merhi and coal magnate Nathan Tinkler. On Monday, Carter denied any contact with either man, saying he was unsure how their money found its way to Eightbyfive.

Emails obtained by Icac suggested the donations raised by Carter were being used to fund Hartcher’s campaign in Terrigal, the campaign of Darren Webber in Wyong, and Chris Spence in The Entrance. All three Liberal MPs are scheduled to face the inquiry before it adjourns next Monday.

Carter said that since Icac began investigating fundraising on the NSW central coast, “Mr Hartcher and I have avoided each other”. He gave little indication of why he was now confessing his role in the alleged scheme, but said he regretted involving his partner, Ekarin Sriwattanaporn.

“I was very upset. I was worried about Ek, and the fact that I’d involved him in this,” he said.